Global Witness, markets and corruption

If one knew nothing but the hectoring tone of the Global Witness report Hostile Takeover, one could easily conclude that members of Hun Sen’s family have done nothing since 1979 except manipulate government influence to enrich themselves illegitimately. GW totally ignores the history that has created the current situation of the Cambodian economy.

Under great international pressure (including from open and covert supporters of the Khmer Rouge military threat), three decades ago the Cambodian government legalised the conduct of private businesses. The 1991 Paris peace accord and the arrival of UNTAC brought the full opening of Cambodia as a market economy.

Accumulating wealth the way rich people in the West do it was what Cambodians were told they should attempt. Many of them, including but not limited to children of people in politics, tried to do so. Hun Mana, Hun Sen’s oldest daughter, has been a successful entrepreneur for two decades. Unless GW has some evidence that her businesses have thrived for illegitimate reasons, that is part of the usual workings of a market economy: some people become richer than others.

If GW doesn’t like this economic reality, it should complain to the people who demanded that Cambodia adopt a market economy. But there is evidence that GW has no objection to the rule of the market in general – only in Cambodia.

Stephen Peel is quoted in the GW press release about the report warning foreign investors about the “risk” of “doing business with companies that are ownedor controlled by the country’s ruling family”. Peel is identified as “a former senior partner at private equity firm TPG Capital and member of the Global Witness board”.

That description doesn’t give the full flavour of Peel’s career. After graduating from Cambridge University in 1989, Peel went to work for Goldman Sachs, the banking company which ordinary Americans love so much that in 2008 they besieged the Congress, demanding that it give Goldman Sachs billions of dollars to make up for its stupidly greedy bad investments.

Peel’s speciality was leveraged buyouts. This is a method of making huge amounts of money by impoverishing people who actually produce things or provide useful services. It was developed in the United States at a time when the economy was stagnant and interest rates and share prices both were low. People who provided the model for the character Gordon Gekko (“greed is good”) in the 1987 film Wall Street worked out that they could borrow large sums at low interest, buy control of companies whose shares were underpriced, sell off (“strip”) the company’s assets, use the proceeds to repay their loan and still have hundreds of millions left over as profit.

In 1997, Peel was hired by TPG to open its European office. According to the June 20, 2014, Wall Street Journal:

“TPG Capital’s Stephen Peel has earned billions of dollars in profitsfor the firm, repute as a private-equity pioneer, and the disdain of Germanpoliticians, one of whom branded deal makers as ‛locusts’ following Mr. Peel’sdebt-laden takeover of bathroom-fittings maker Grohe in 2004.”

It wasn’t always easy, as the WSJ article noted: “In Russia, TPGis currently sitting on a $1.8 billion profit from a 2009 takeover of the Lentasupermarket chain, which succeeded only after a feud between rival shareholdergroups descended into a street brawl.”

There were other little problems that TPG (not necessarily Peel personally) ran into. The Economist of June 20, 2015, reported on a court case that arose after “the takeover in 2005 of a Greek telecoms group, TIM Hellas, byfunds set up by TPG and Apax Partners, two private-equity giants”. According to the Economist:

“Hellas wobbled—and eventually toppled—after the private-equity sponsors increased its debt many times over in shortorder, while simultaneously extracting several times moremoney than they had put in. This prompted a legal battle with bondholders and the liquidators, which is still going on. The liquidators have accusedthe former owners of ‛duplicitous and catastrophic plunder’ that amounted to ‛one of thevery worst abuses of the private-equity industry’. Apax denies wrongdoing. TPG declinedto comment.”

In 2014, a New York court ordered TPG and Apax to repay $565 million to private investors in Hellas.

But mere street brawls and court brawls can’t stop the money flows. According to the WSJ, “a list of 10 deals that Mr. Peel led in seven countries shows he made his firma $4.47 billion profit from assets that cost $2.49 billion”.

How about that, folks! A profit of 180 percent! And the $4.47 billion “earned” by Mr Peel is 22 times the total wealth that GW attributes to Hun Sen’s family, and roughly 280 times the ownership described in the GW documents. No wonder Peel warns against investing in Cambodia: there’s a lot more to be made a lot more easily with TPG and similar firms in Europe and the US.

The activities of such Western firms are not called “corruption” – except occasionally, when the thieves fall out and pursue each other in court (or street brawls). The logic of groups like GW is that the underdeveloped countries should be more like the developed countries – or rather, like the image of themselves that developed countries’ governments promote. GW doesn’t seem to realise that it is primarily the developed countries that have made the underdeveloped countries what they are.

Dr Hickel pointed out that, while the World Bank estimates that developing countries lose $20-40 billion a year to corruption, tax avoidance “accounts for more than $900bneach year, money that multinational corporations steal from developing countries through practices such as trade mispricing”. He continued:

“This enormous outflow of wealth is facilitated by a shadowy financial system that includes tax havens, paper companies, anonymous accounts, and fake foundations, with the City of London at the very heart of it. Over 30 percent of global foreign direct investment is booked through tax havens, which now collectively hide one-sixth of the world’s total private wealth.”

Dr Hickel offers some information about London and the UK that ought to interest a campaigner against corruption and undemocratic political influence like Global Witness, which has offices in London:

“With the City of London at the centre of the global tax haven web, how does the UK end up with a clean [rating from Transparency International]?

“The question is all the more baffling given that the City is immune from many of the nation’s democratic laws and free of all parliamentary oversight … More than 70 percent of the votes cast during [City of London] council elections are cast not by residents, but by corporations – mostly banks and financial firms. And the bigger the corporation, the more votes they get, with the largest firms getting 79 votes each. This takes US-style corporate personhood to another level.

“… This kind of corruption is not entirely out of place in a country where a feudalistic royal family owns 120,000 hectares of the nation’s land and sucks up around £40m ($65.7m) of public funds each year. Then there’s the parliament, where the House of Lords is filled not by election but by appointment, with 92 seats inherited by aristocratic families, 26 set aside for the leaders of the country’s largest religious sect, and dozens of others divvied up for sale to multi-millionaires.”

When can we expect the Global Witness report denouncing this vast business and political empire, beside which GW’s grossest exaggerations about Cambodia appear very small indeed? Don’t hold your breath.

Different countries have varying legal definitions of corruption. But there are no markets anywhere in the world that do not harbour some dishonest behaviour. People who fund organisations like Global Witness often do so because they hope that a focus on corruption in underdeveloped countries will distract attention from the corruption by which Western corporations rob countries like Cambodia. (Last year, well over half of donations received by Global Witness came from the foundations of two hedge fund billionaires, George Soros and John Arnold.)

Does that mean we should ignore or tolerate the corruption that does exist here? Not at all. But it does mean that some people are paid to find some corruption, whether it is real or not.